HUD Updates Flat-Rent Requirements for PHAs

HUD’s Office of Public and Indian Housing recently issued Notice PIH 2017-23, clarifying HUD’s interpretation of the statutory amendment related to flat rents. The notice applies to public housing authorities (PHAs) that operate a Public Housing program, as well as to families residing in, or applying to, the Public Housing program. HUD requires that PHAs offer families the choice of paying income-based rent (generally up to 30 percent of adjusted income) or a flat-rate rent, which is based on the market rent charged for comparable units in the private unassisted rental market. Flat-rate rents won’t be affected by increases in income from employment or disability benefits, but may be higher than income-based rent. 

In an audit published last year by HUD’s Office of Inspector General, auditors found that many PHAs were unaware of or didn’t properly implement the flat-rent requirements. They estimated that PHAs undercharged flat-rent tenants by an estimated $527,052 nationwide during December 2016 and could undercharge flat-rent tenants by approximately $6.3 million during the next year if HUD doesn’t correct this problem [HUD Audit 2017-KC-0007, July 2017].

We’ll go over the notice’s guidance about complying with the flat-rent requirement on an annual basis, phasing in flat rents, consulting tenants each year regarding their option to choose flat rents or income-based rents, and seeking an exception flat-rent level. It’s important to remember that it’s up to tenants to decide each year whether they’re better off paying rent based on their actual income or paying the set flat rent.

Background

The Fiscal Year 2014 (FY14) Appropriations Act required PHAs to establish flat rents at no less than 80 percent of the Fair Market Rent (FMR) and established rent increase phase-in requirements to prevent family rental payments from increasing by more than 35 percent. The FY15 Appropriations Act amended the FY14 Act regarding the minimum flat rent, and HUD issued an interim rule implementing these changes. Consequently, flat rents must be set at no less than the lower of 80 percent of the FMR or the Small Area Fair Market Rent (SAFMR). And PHAs may apply for a flat rent lower than these two options if the PHAs demonstrate, through a market analysis, that those rent options are not reflective of market value.

Flat-Rent Exception

The flat-rent exception request process is for a PHA that wishes to base its flat rents on specific market conditions supported by a market analysis. HUD requires flat-rent exception requests only when PHAs are setting flat rents at an amount that’s lower than the lesser of 80 percent of the FMR, or 80 percent of the SAFMR (or if a SAFMR is not available, 80 percent of the unadjusted rent), less utility allowances, if applicable. In other words, PHAs don’t need to submit exception requests to set flat rents at or above 80 percent of the FMR or SAFMR, or if the SAFMR isn’t available, 80 percent of the unadjusted rent.

HUD updates and posts new FMRs annually. Typically, the final FMR rates for the current fiscal year are effective on or around Oct. 1. PHAs may access FMR rates at https://www.huduser.gov/portal/datasets/fmr.html. From the effective date of the current fiscal year’s FMRs, PHAs have 90 days to either implement new FMR-based flat rents or submit an exception request. In a typical year, this would mean that a PHA will have until Dec. 31 to either update its flat rents based on the new FMRs, or submit an exception request.

While HUD is reviewing a PHA’s flat-rent exception request or any supplemental information, the PHA may continue to use its current flat-rent schedule. PHAs must receive written HUD approval to utilize an exception flat rent prior to implementing the new exception flat-rent rates. In the event that a PHA submits an incomplete flat-rent exception request and/or incomplete supporting market analysis, HUD will provide that PHA with two opportunities to cure deficiencies before disapproving the request.

An approved exception request will remain in effect until the end of the 90-day period commencing upon the effective date of HUD’s Final Fiscal Year FMRs or the date on which a PHA updates and makes effective its flat-rent schedule based on that fiscal year’s FMRs, whichever comes first. The PHA must update its flat rents to the approved flat-rent exception amount after the date of HUD’s approval. Thereafter, the PHA may immediately apply the exception flat rent amount to intakes and reexaminations. However, the PHA must apply the approved exception flat-rent amount to all intakes and reexaminations that take effect 60 days or more after HUD’s approval date.

How to Comply with Flat-Rent Policies

To comply with the flat-rent requirements annually, no later than 90 days after the effective date of new FMRs or SAFMRs published by HUD, the PHA must:

• Compare the current flat-rent amount to the applicable FMR and SAFMR/unadjusted rent. If the PHA is in compliance with this the law, no further steps are necessary. If the flat rent is at least equal to the lower of 80 percent of the FMR, or 80 percent of the SAFMR (or if no SAFMR is available, 80 percent of unadjusted rent). If the current flat rent is less than the lower of 80 percent of FMR or SAFMR, the PHA must set flat rents at no less than 80 percent of the lower of the 80 percent FMR or 80 percent SAFMR/80 percent unadjusted rent, subject to the utilities adjustment, or the PHA may request an exception flat rent;
• Update the flat-rent policies in the Admissions and Continued Occupancy Policies (ACOP) as necessary;
• Permit the family to choose between the flat-rent amount and the income-based rent for all new admissions; and
• Offer the updated flat-rent amount at the next annual rent option for families that are current Public Housing residents, and permit the family to choose between the flat-rent amount and the income-based rent, subject to the phase-in requirements.

For PHAs with an approved flat-rent exception request, the PHA must update its flat rents to the approved flat-rent exception amount immediately after approval for all intake and reexamination activities. The PHA may apply the approved flat-rent exception amount immediately to intakes and reexaminations, and must apply it to any intake or reexamination that takes effect 60 days or more after the approval date.

Phase-In Requirements

If an existing flat-rent tenant’s rental payment prior to any applicable adjustments for utilities payments increases by more than 35 percent as a result of changes to the flat-rent amount, the increase must be phased-in such that a family doesn’t experience an increase in their rental payment of more than 35 percent.

To determine how to phase-in increases in rental payments, PHAs must on a case-by-case basis, at the family’s next annual rent option, compare the updated flat-rent amount applicable to the unit to the rent that was being paid by the family immediately prior to the annual rent option. If the new flat rent amount would not increase a family’s rental payment by more than 35 percent, the family may choose to pay either the updated flat-rent amount or the previously calculated income-based rent. And if the PHA determines that the updated flat-rent amount would increase a household’s rental payment by more than 35 percent, the family may choose to pay the phased-in flat-rent amount resulting from the flat-rent impact analysis or the previously calculated income-based rent.

For example, suppose a household is currently paying the flat-rent amount of $500 per month. When the household meets with the PHA to discuss rent options, the PHA tells them that the flat-rent amount has increased to $700. But the PHA tells the household that their flat-rent payment would increase to only $675 because flat-rent changes must be phased-in as necessary to ensure that the household’s existing rental payment doesn’t increase by 35 percent or more annually. The household has the option to pay either the $675 per month, or an income-based rent of $800 per month based on the most recent examination of their income. The household chooses to pay the flat-rent amount of $675.

Now, suppose that at the next annual rent option meeting between the household and the PHA, the PHA informs them that the flat-rent amount has increased to $750 per month due to an increase in the FMR. Because the new flat rent amount represents less than a 35 percent increase from the previous rental payment, the household has the option to pay the new flat rent amount of $750 or the income-based rent amount of $800 based on the most recent examination of family income and composition. The household chooses to pay the new flat-rent amount of $750.

Annual Review of Rent Options

HUD regulations at 24 CFR 960.253(a) require PHAs to annually give families the option to choose between paying the flat rent or the income-based rent, and stipulate that PHAs may not give families the option more than once per year, except in the case that the family has chosen the flat rent and experiences a financial hardship. Further, 24 CFR 960.253(e) stipulates that PHAs provide sufficient information to allow a family to make an informed choice regarding rent options. PHAs must provide at least the following information:

• The PHA’s policies on switching the type of rent due to financial hardship;
• The dollar amount of the flat rent and the income-based rent.

For families who choose to pay flat rents, PHAs are provided the flexibility not to conduct income reexaminations annually. HUD regulations at 24 CFR §960.253(e)(2) and §960.257(a)(2) provide that for families that chose to pay flat rents PHAs must conduct reexaminations of family income at least once every three years, not annually. In years when a PHA doesn’t conduct a full reexamination of family income, PHAs are still required to give the family the option of paying the flat rent or the income-based rent as calculated from the most recent examination of family income and composition.

In order for PHAs to comply with the requirements to review rent options annually with families, and to provide families with sufficient information to make an informed choice, PHAs must do the following:

At initial occupancy, or in any year where a current program participating family is paying the income-based rent:

• Conduct a full examination of family income and composition at the first annual rent option (Year 1);
• Inform the family of the flat-rent amount and the rent amount determined by the examination of family income and composition;
• Inform the family of the PHA’s policies on switching rent types due to financial hardship; and
• Apply the family’s rent decision at the next lease renewal.

At the second and third annual rent options, for families that choose to switch from income-based rent to pay the flat rent:

PHAs may, but are not required to conduct a full examination of family income and composition for the second and third annual rent options. If a PHA chooses not to conduct an examination of family income for these annual rent options, PHAs must use the income information from the examination of family income and composition from the first annual rent option;

• PHAs must inform the family of the updated flat-rent amount, and the rent amount determined by the most recent examination of family income and composition;
• PHAs must inform the family of the PHA’s policies on switching rent types due to financial hardship; and
• PHAs must apply the family’s rent decision at the next lease renewal.

For the purpose of conducting the rent option meeting for a family that has paid the flat rent for the previous three years, and for which the PHA has not conducted a reexamination of family income and composition in the last three years, the PHA must complete a full re-examination of family income and composition in order to update the income-based rent amount.

It’s important to note that the flat-rent amount a family pays is not locked in for the three-year period. Instead, the PHA must revise the flat-rent amount from year to year based on changes to the FMR. Families currently paying the flat-rent amount must be offered the choice between the updated flat-rent amount, and the previously calculated income-based rent.

Flat-Rent Reporting

PHAs are required to report the amount of a flat rent and any ceiling rent to be charged to a household on line 10b of the form HUD-50058. Also, PHAs must consider whether households are responsible for any utility expenses for a unit when establishing the flat rent for a unit. In the case that a household is responsible for paying for utilities, PHAs should report the amount of such utility allowance on line 10e of the form HUD-50058.